Should I choose Angel investment or a Start Up Loan for my business?

So, you’ve decided that to get your start-up off the ground you’re going to need some external funding.

Two of the most common methods of getting external funding into your new business is via Angel investment or by using a Start Up Loan.

In this article we’ll look at both types of finance to help business owners decide which type of finance might be best for them.

As with all financial decisions, it’s a good idea to seek independent specialist financial advice to ensure a financial product is right for you and your business before committing.

What is Angel investment?

Angel investors are usually experienced entrepreneurs or individuals with a strong background in business who invest their own money in exchange for a share of your business. 

When they fund your startup, they gain an equity stake, meaning they own a percentage of your business.

However, there are some trade-offs to consider. 

Since angel investors have a stake in your business, they may want to be involved in decision-making.

While their input can be helpful, it might also impact your independence as a founder. 

Differences in vision or strategy could lead to disagreements about how to run the business.

To make investing in smaller businesses more appealing, the UK government offers the Seed Enterprise Investment Scheme (SEIS). 

SEIS provides tax relief to angel investors, encouraging them to back promising start-ups with their money rather than holding it in a savings account of using it in some other way.

Learn more about Angel investment.

What is a Start Up Loan?

A Start Up Loan is a personal loan for business purposes and is specially designed to help people start or grow their business. 

Aspiring entrepreneurs or new business owners can often find it difficult to secure finance for their start-ups, leading government to create the Start Up Loan in an attempt to make it easier for those groups to secure finance.

A Start Up Loan is an unsecured debt product, meaning that you don’t need to use your house or some other valuable asset you own outright as security to receive the money.

It comes with a fixed 6% interest rate and offers extra support to set you up for success.

Learn more about a Start Up Loan.

How much funding can I access via a Start Up Loan or Angel investment?

With a Start Up Loan, applicants can borrow from £500 up to £25,000.

If the business has multiple directors, each one (up to a total of four) can take out their own Start Up Loan, meaning a total cash injection for the business of £100,000.

In contrast, Angel investors will buy a portion of your business (usually between 10% and 25%) in return for a large cash injection – this could be anywhere from £5000 up to £500,000 in some cases.

The precise amount you get from Angel investment will be a negotiation between you and the Angel investor informed by:

• the value of your business in the eyes of the Angel investor
• the amount you need to finance your business aspirations
• the percentage of your business you’re willing to part with.

How easy is it to get a Start Up Loan or Angel investment?

Since being launched in 2012, over 100,000 people have taken out a Start Up Loan to finance their business, many of whom were unable to secure finance from other sources.

The application process is much the same as for any other type of loan – requiring an eligibility and credit check before asking those applying to fill out an application form and include key documents such as a business plan and cash flow forecast.

Angel investment on the other hand, can be far more difficult to obtain. 

First, you’ll need to refine your pitch, knowing exactly the amount of funding your business needs and what you’ll spend it on in order to grow.

You’ll then need to seek an Angel out – this can be done in a number of ways including:

• asking your professional network
• going to pitch events
• searching Angel directories
• speaking to a business that has worked with an Angel in the past.

Once you’ve identified a number of potential Angel investors, you’ll need to arrange meetings with them where you’ll deliver your pitch in the hope of piquing some interest.

Remember that Angel investment is very competitive with an Angel investor often only choosing to invest in one or two businesses from the hundreds of pitches they may see.

Unsurprisingly, there are far few small businesses benefiting from Angel investment than there are from a Start Up Loan.

What do I need to prepare before applying for a Start Up Loan or seeking Angel investment?

When applying for a Start Up Loan, applicants will need to put together a Business plan, Cash flow forecast, and a Personal Survival Budget.

These documents will be used to assess the strength and viability of the applicant’s business as well as their ability to afford the repayments.

Templates for each document can be downloaded from the Start Up Loans website.

When seeking Angel investment, entrepreneurs will need to develop their pitch deck.

A pitch deck is a key element of your presentation for funding, designed to visually support your value proposition and spark interest in your business. 

It serves as the “shop front” for your company, giving potential investors a glimpse into what you can offer.

Your pitch deck should address critical topics such as:

• your product – What it is and what problem it solves
• the market – The size, scope, and opportunities within your target industry
• your team – The people behind the business and their expertise
• the financial ask – How much funding you’re seeking and exactly how it will be used
• exit strategy – The potential returns for your investors.

It’s important to support your pitch deck with concrete evidence and compelling insights. 

Learn more about how to develop a pitch deck.

What will a Start Up Loan or Angel investment cost?

One of the major advantages of Angel investment is that you receive a cash injection into your business without needing to pay the money back.

Instead, the Angel investor receives a stake in your business in return for their funding, meaning that you will no longer own 100% of your business.

The value of that stake will fluctuate depending on the overall value of the business.

Selling a stake in your business could have implications for how you run it moving forward and who ultimately makes the decisions as the Angel investor may well demand to be a part of the decision-making process.

On the other hand, a Start Up Loan will require you to repay the entirety of the loan (plus interest charged at 6%) over the course of the loan duration – anywhere between one and five years.

What additional support does a Start Up Loan or Angel investment provide?

Beyond the financial support, angel investors can also offer a range of additional benefits. 

Since they tend to be experienced businesspeople in their own right, they can offer the owner of a business they invest in valuable advice and mentorship to help the business grow.

Since they literally own a piece of the business and thus have an interest in seeing it succeed as their stake will become more valuable, they may also make use of their extensive networks, offering access to connections that could lead to new opportunities for growth.

When someone takes out a Start Up Loan, they become eligible for 12 months of free business mentoring.

Having a mentor can offer a fresh, unbiased perspective on your current strategies, helping you make smarter decisions. 

Plus, they can connect you with knowledge and resources you might not have found on your own.

Start Up Loan recipients can also access a customer benefits programme which offers a variety of offers and discounts on:

• business and personal development
• tech empowerment
• everyday top brands.

How long does a Start Up Loan or Angel investment last for?

With a Start Up Loan, the relationship between the applicant and the lender ends once the applicant has paid back the entirety of the amount of money they borrowed, plus any accrued interest.

This will be during an agreed upon period that could be anywhere from one year to five years.

If a business has paid back their loan and is still under five years old, they could then apply for a second Start Up Loan.

Angel investment has no such defined end point and business owners should expect to work with their Angel investor for a long time.

Typically, Angel investors work with a business for at least five years, after which they may decide to sell their stake in the business or take more of a back seat.

So, when the relationship ends is more likely to be down to the individual investor rather than the business owner which can make the relationship quite open ended.

But why not choose both?

Many businesses use a combination of both equity and debt products to finance their operations and expansion.

In some circumstances, using both equity and debt finance can be mutually supportive for a business –allowing entrepreneurs to continue to finance their venture whilst keeping more control over their business (in the case of equity finance) and keeping monthly loan repayments down (in the case of debt finance).

Interested in learning more?

Whilst a Start Up Loan and Angel investment are both common ways entrepreneurs finance their venture, there are other options.

Our Making business finance for you guide takes you through many of the different funding options that are suitable for starting a business.